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In: Economics

Some analysts use the short-run and long-run effects on the aggregate demand-aggregate supply model to argue that expansionary monetary policy can't affect employment in the long run because in the short run



Some analysts use the short-run and long-run effects on the aggregate demand-aggregate supply model to argue that expansionary monetary policy can't affect employment in the long run because in the short run, monetary policy shifts the aggregate: 

 demand curve to the left, but over time the increase in prices shifts aggregate supply to the right so that GDP will end up going back to its same level of output with a higher price level. 

 supply curve to the left, but over time the increase in prices shifts aggregate demand to the right so that GDP will end up going back to its same level of output with a higher price level. 

 supply curve to the right, but over time the increase in prices shifts aggregate demand to the left so that GDP will end up going back to its same level of output with a higher price level. 

 demand curve to the right, but over time the increase in prices shifts aggregate supply to the left so that GDP will end up going back to its same level of output with a higher price level.

Solutions

Expert Solution

Correct Answer:

D

Expansionary monetary policy, will help increase in consumption and investment spending. It stimulates the AD and AD curve shifts to the right. It increases the price level and demand pull inflation takes place. It causes AS to shift to the right. So, in the long run, output goes back to the potential output level, but at a higher price level. So, employment increases in the short run, but not in the long run.

Rahul Sunny answered 2 years ago
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